In the past it was only City whizz kids with instant access to real time market information that indulged in spread betting on companies and markets. But like contracts for differences (CFDs), the popularity of spread betting has exploded, particularly with the advent of the internet.
That said, spread betting is a high-risk means of punting on the stock market.
And be warned: the losses are horrendous if you get it badly wrong. With traditional fixed odds betting you might wander into a bookmakers and place a wager and – if your luck is anything like mine – you will lose your stake money.
Spread betting is completely different animal. Win and the upside is potentially unlimited. Get it wrong and you’re not so much left chasing your losses, rather they end up chasing you.
But there is also much to commend it. Buying shares by traditional means is a one-way bet. You are wagering on a share price rise. Spread betting allows you bet against an individual share, or indeed the entire market – as well as buy into its upside.
And it allows you to wager on all manner of markets and events – from the gyrations of the FTSE 100 right through to the outcome of a cricket match.
Enough of the theory, here’s how it works
A spread better such as IG Index will quote you two prices in much the same way as an equity market maker would – giving you a bid and offer price.
One of the favourite bets is a punt on the movement of the Footsie (FTSE 100 Index).
We are offered a spread of 5,700-5,705. So what exactly does that mean? Well, simple really.
If you think the Footsie is likely go above 5,705 then you would instruct the broker you wanted to buy. And if you expected it to dip below 5,700 then you would instruct the broker to sell.
Well, let’s say for the sake of argument, we believe the market will end the day below 5,700 – perhaps we think after the recent good run there will be a bout of profit taking. So we tell our bookmaker to sell. In fact we are ultra confident and stake 50 for every point the the Footsie falls below 5,700.
The spread betting firm will fix a price that mirrors the market movement. So at midday the spread has moved to 5,675-5,680, which means the Footsie has fallen.
Fearing a revival we want to take our profits on the bet. So exactly do we do that? Well, we would then ask the broker to buy.
The new buy price as we can see is 5,680. We know we have won the wager with the spread betting company. But just how much have we made? All we need to know is the points difference between price at which we sold the Footsie and point at which we bought to close off our position.
The maths is reasonably simple. 6,700 minus 6,680, which gives us a 20 point difference. And remember, we were very confident in our ability to predict the movement of the Footsie so we staked 50 a point.
That gives us tidy 1,000 profit. Not bad for a morning’s work. And remember, this is a bet with a bookmaker so there is no capital gains tax, or stamp duty. Isn’t that just dandy?
Well let’s see what happens when it all goes horrendously wrong. Let’s take our bet on the Footsie.
We won’t change much, save that we woke up and thought, well, the Footsie is on a roll and instead of selling, we bought.
Remember the spread we were quoted was 5,700-5,705. We bought at 5,705. So anything above that level is clear profit. And we were, in this alternate existence, if anything even more bullish, so we staked 100 a point.
Rash, I would say as this is the first time we have ever made a spread bet. But instead of roaring ahead, the Footsie starts dropping and at midday, chastened by our stupidity we decide to cut our loses and close the position.
Remember the midday spread was 5,675-5,680. To close off we need to sell and have to do so at 5,675. To calculate the losses we take the difference between price at which we bought and the price at which we sold.
So that gives is 6,705 minus 5,675 a difference of 30 points. Now remember how rash we were? We staked 100 a point, giving us losses of 3,000. For the mega-rich footballers of the Premiership that is probably less than a day’s wages.
But for most it equates to probably close to two-months’ net salary. The moral of this story? Well, obviously, don’t bet what you can’t afford.
But, I would say if you are going to indulge in something as risky and complicated as spread betting ensure that you know the risks involved. Study as much as you can around the system. Accept a stop-loss (which limits the downside) if it is offered.
The spread betting companies are not evil, they take every opportunity to educate and spell out the potential pitfalls. If they offer you coaching, accept it. Above all don’t bet until you understand all the risks involved.
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